Which of the Following Holds True for the Writer of a Bond

question 45

Multiple Choice

Which of the following holds true for the writer of a bond call option if interest rates decrease?

• A)Makes profits limited to call premium
• B)Makes losses limited to call premium
• C)Potential to make large losses
• D)Potential to make unlimited profits
• E)Makes losses limited to call premium and potential to make unlimited profits

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Definitions:

Times Interest Earned

A metric assessing a firm's capability to fulfill its debt requirements using its earnings prior to interest and taxes.

Market Rate

Market rate is the common or prevailing price level for goods, services, or financial instruments in a specific marketplace.

Contract Rate

The agreed-upon price or interest rate specified within a contract.

Bond Indenture

A legal document specifying the terms and conditions of a bond issue, including the interest rate, maturity date, and other obligations of the issuer.